Credit Report Reality Check: Here’s How Big Brother Is Watching You

Posts Tagged ‘Credit Scores’

Credit Report Reality Check: Here’s How Big Brother Is Watching You

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If you think that the credit-reporting system is too invasive, unfair, or not necessarily accurate in assessing how risky a person truly is, then you’re about to have a lot more to complain about.

It turns out that Fair Isaac – the company that developed the FICO credit score ‑‑ is teaming up with a company called CoreLogic to create new credit scores for the mortgage industry.

CoreLogic supplies financial, consumer and real estate information to lenders and other businesses.

Now these two powerful companies, both of which have made an art out of the science of decision analytics, are going to start tracking and scoring a whole lot of things that millions of consumers take for granted and don’t realize may impact their credit rating.

For example, have you looked into or actually received a payday loan lately? You may not have stepped foot into any seedy payday lender store, but have you applied for cash from any online lender recently? Well, both types of activities are about to be tracked.

Have you missed any child support payments?

Have you filled out an apartment rental application or been evicted by a landlord lately?

Or have you gotten other loans that you thought were ‘under the radar’ because they’re not being reported to Equifax, Experian and TransUnion?

All that information is about to be fair game too, and it will be tracked, analyzed and judged as either risky (or not) in this new credit score that CoreLogic and FICO are creating for mortgage lenders.

CoreLogic, which is going to be presenting at the FICO World 2011 conference in New York in November, is going so far as to market its own new CoreScore credit report by stating: “Everything will change November 30, 2011.”

According to the company, the range of new information it will aggregate and report includes:

Properties owned—with and without debt obligations
Mortgage obligations with companies that may not report to traditional credit reporting agencies
Property legal filings, such as notices of default
Property tax amounts and payment status
Estimated market values on all U.S. properties owned
Rental applications and evictions
Inquiries and charge-offs from pay-day and online lenders
Consumer-specific bankruptcies, liens, judgments and child support obligations
Other (unspecified) data

Mortgage Lending Already Tight

Obviously, it’s already very tough for the average American to get a “Yes” from a bank when it comes to securing a mortgage. I shudder to think at how much more difficult it will become to get a loan when every single aspect of your financial life, every seemingly benign decision you’ve made, and virtually every transaction that you’ve entered into, suddenly starts getting systematically tracked, finely sliced and diced, and codified in some way; all to suggest to lenders whether you’re a good risk or a bad credit risk.

And of course, the implications of a good or bad credit rating go far beyond your ability to get loans. Your credit rating impacts your car and life insurance rates, your ability to rent an apartment, and even your ability to get hired and promoted.

This is the new credit reality that Americans are dealing with – and to a greater extent than ever before. I talked about this phenomenon in my book, “Perfect Credit: Seven Steps to a Credit Rating,” where I described one of the unwritten rules about credit. One such unwritten rule is simply this: Every Transaction Counts.

And I mean every transaction. Anything you sign your name to, any contract you enter into, any agreement with a financial services company, retailer or other entity, is subject to being monitored, dissected, analyzed, judged, and ultimately scored by the credit‑scoring industry.

Beware: Everything is Tracked and Every Transaction Counts

That means you must be careful of everything you do and how it could potentially help or hurt your credit record. If you sign‑up for a newspaper subscription and you don’t pay the bill – maybe because your Sunday paper is routinely absent from your doorstep – your failure to pay (justified or not) could nevertheless come back to haunt you in the form of a ding on your credit report.

If you have medical bills that are in dispute, or that you contest for one reason or another, again think carefully about the implications of non-payment. Those medical bills could get turned over to a collection agency and then – poof! – your credit is damaged.

Certainly, if you’re juggling any traditional forms of credit – like credit cards, a mortgage, car loans or student loans – you should naturally you expect those to be tracked and reported to the credit bureaus.

But what about the library book that you checked out and failed to return? Or the DVD that your kid didn’t even tell you he borrowed from the library and never took back? What about that parking ticket that you got when you were visiting another town that you felt was given to you unjustly. You chucked it, thinking you could just forget it about. Unfortunately, the credit scoring system won’t forget about it.

The truth is that, from a credit-scoring standpoint, it really doesn’t matter why a bill didn’t get paid. The only thing that matters is that something you are allegedly supposed to be responsible for is financially delinquent in some way, or not paid as agreed.

So anytime you owe anybody anything – or even if they claim you do – and anytime you enter into any financial transaction whatsoever, if money is changing hands, or credit of any kind is being extended you should expect the details of those transactions to be monitored and tracked by someone.

Probably feels a bit like Big Brother is watching, right? But this is the new credit reality.

Sure, it’s true that people who religiously pay their bills on time and have “thin” or “no” credit files may ultimately benefit from having non-traditional bills reported to the credit bureaus and scored by credit scoring firms. These individuals may be able to demonstrate credit-worthiness and thereby secure loans or credit in the future.

But frankly, they’re probably in the minority.

I fear more for the vast numbers of Americans who are struggling through this current recession; those without the financial means to stay afloat, and those who lack the ability to throw money at certain problems and make them go away.

These are the people, I’m afraid, who are going to find that their credit scores suffer more than ever in this daunting, new world of credit.

How Do Race and Gender Impact Your Credit Score?

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Author: The Money Coach

Just in case you like to speed read articles, I’ll cut to the chase and tell you that race and gender DO NOT impact your credit score.

Many consumers believe a host of myths and misconceptions about their credit scores. Some of the biggest fallacies surrounding this topic involve race, income and other factors that do not impact your credit rating at all. Here are some other common myths.

Fact Vs. Fiction About Credit Scores

FICTION: If I check my credit report often, all those “inquiries” will lower my credit score.

FACT: Your personal inquiries are called “soft” inquiries and do not impact your credit score at all. You can check your credit as much as you’d like with no negative impact, as long as you do it through a credit bureau or a company authorized to issue credit reports, such as Fair Isaac, creator of the FICO score.

EXPLANATION: Even though you may see all kinds of inquiries in your credit file, many of them have no bearing on your FICO score. For instance, your FICO score doesn’t count your own inquiries, as well as those from existing creditors who are reviewing your account, or lenders trying to offer you “pre-approved” credit.

FICTION: I pay cash for everything and don’t buy on credit or use credit cards, so my credit score should be excellent.

FACT: Having no credit history or never using credit can have a negative impact on your credit score.

EXPLANATION: It helps your FICO score to have some history of paying credit obligations on time. FICO reports that people with no credit cards tend to be higher risk than those who have credit cards, use them periodically, and manage their debt responsibly.

FICTION: I’m going to close out my old accounts since I’m not using them any more, and that will improve my credit score.

FACT: Depending on your overall credit profile, you can actually hurt your credit score by closing older, more “seasoned” accounts.

EXPLANATION: Generally speaking, it works in your favor to have older accounts in your credit file because it shows that you have a longer credit history.

FICTION: The most important factor in my credit score is whether or not I am “maxed out” on my credit cards.

FACT: The single biggest determinant of your credit score is how well you’ve paid your bills on time in the past.

EXPLANATION: Your FICO score takes into account whether or not you’ve had late or missed payments, how far past due your bills were, how long ago the late pays occurred, as well as whether you have any collection items or public records, such as a repossession, foreclosure or judgment against you.

FICTION: My age, race, gender, marital status, income or where I live can impact my credit score.

FACT: None of those factors are taken into consideration at all when your FICO credit score is determined.

EXPLANATION: Under U.S. law, it is illegal to for credit scoring to take into account race, age, color, nationality, religion, sex and marital status.

Your credit is of such critical importance that you can’t afford to operate on the basis of false information. So be sure to separate fact from fiction.

All Debt Is Not Created Equally – Why Credit Card Debt Wrecks Your Credit Score

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Author: The Money Coach

Debt is a massive problem in America. We’re up to our eyeballs in debt of all types: mortgage loans, credit card debt, student loans, automobile loans, and more.

Even though home values have plummeted, the average mortgage balance in the U.S. is nearly $200,000; the typical family carries a monthly credit-card balance of $10,000; the average college graduate owes more than $20,000 in student loans; and the median car note now exceeds $27,000. Is it any wonder that Americans owe $2.4 trillion in consumer debt, excluding their mortgages? Throw in another $14 trillion or so in home loans, and it’s clear why our collective debt won’t go away any time soon.

From a credit standpoint please understand that the type of debt you’re carrying matters tremendously when it comes to your overall rating. (See the FICO credit score formula).

I’ve experienced firsthand the impact that being weighed down with debt has on one’s credit. I’ve also heard from countless individuals all around the country whose credit scores were suffering due to their having “bad” debt.

What precisely counts as “bad” debt? Nearly 100% of the time it’s credit-card debt.

If the balances on your Visa, MasterCard, American Express, or Discover cards have gotten out of control, you’re likely doing serious damage to your credit. But other types of debt aren’t good for your credit rating either, such as a department-store card you opened to get 10% off your purchase or the retail credit account you got to buy household furniture. Don’t feel bad if this scenario describes you. I’ve made the same mistakes.

Your FICO score is tied strongly to the credit-card debt you have. In fact, did you know that 35% of your FICO score is based on the amount of debt you have? With regard to this percentage, FICO is overwhelmingly concerned with your current credit-card debt. Let me explain why.

The Differences Between Mortgage, Installment and Revolving Debt

The FICO scoring system evaluates three forms of debt in your credit files: mortgage, installment, and revolving debt.

Mortgage debt is very straightforward. This is the house note you have on your primary residence, the home-equity loan or line or credit you may have, and the mortgage you pay if you’re lucky enough to have a vacation home or investment property. In short, if you own a piece of real estate, and you have a loan for which the house is collateral, you have some form of mortgage debt. Generally speaking, this is the most highly rated form of debt in the FICO^â scoring system.

Next is installment debt. This refers to one-time loans that you are paying off over time by making fixed payments at regularly scheduled intervals.

For instance, assume that you received a $10,000 student loan five years ago and are now repaying it. You may be making $125 payments every month. In this case your loan balance declines every month, part of your payment reducing the principle and part repaying interest on the loan.

The same scenario applies to car loans. In both cases, the lender knows exactly what its risk is at any given time: the outstanding balance on your loan. But the lenders also know that your balance isn’t going to rise. Thus installment loans are “good” forms of debt from a credit-scoring standpoint. They are unlikely to hurt your credit ranking as long as you pay on time.

The last debt category, however, represents a potential minefield for lenders and borrowers alike. Revolving debt, such as credit cards, is the riskiest from a lender’s standpoint because the lender has far less control over this debt, and you call the shots in many ways.

Banks Take on More Risk With Credit Cards

Assume, for example, that you have a MasterCard with a $5,000 credit limit. Your balance one month might be $1,900, but last month the balance was $1,255, and the month before that it was $1,641. As it stands, neither the lender nor FICO^â has any way of knowing how much you’re going to charge in any given month. They can try to predict it—and they do try—but they can’t know with certainty whether you will charge $30, $300, or even $3,000 on your card in the following month.

Revolving debt isn’t scored favorably in the FICO^â model because no one knows how much you will pay on your credit-card balance. You might decide to make minimum payments; you might opt to pay $500 against the overall balance; or you might decide to pay off the entire balance.

Whatever the case, the payment amount is pretty much up to you, provided that you meet the mandated minimum. But that’s not much, since most banks and credit-card issuers require only that you pay about 4% of the outstanding balance in any given month.

This means that on a card with a $1,900 balance your minimum payment would be just $76 while the bank’s exposure is still $1,824. The latter is the amount of money at risk for them if you don’t pay up for any reason.

Moreover, if you fail to pay, that credit-card balance due is no longer a “risk-weighted asset.” It swings over to the “non-performing” asset section of the bank’s balance sheet. Extending credit via credit cards can be a high-stakes enterprise. When a bank approves your credit-card application, it basically is agreeing to let you take out a loan. Issuing that credit card can be far riskier than making a loan to someone buying a car because in the latter case the bank knows exactly how much the monthly payments will be.

Speaking of cars, one final difference between installment loans, such as auto loans, and revolving debt, like credit cards, demonstrates why the latter is deemed riskier.

A car loan is a secured loan. If you don’t pay what you owe, the lender can come to your house and repossess the vehicle. (And don’t even think about trying to hide it around the block when your payment is past due. I tried that many years ago while I was in college, but the repo man still found my Hyundai Excel and hauled it away.)

A credit card, on the other hand, is an unsecured form of debt. If you charge $800 on your Visa card for that flat-screen TV you just had to have, what is the bank going to do if you don’t pay your credit-card bill? They can’t come into your house and snatch that 40-inch TV off the wall. So they’re mainly stuck with reporting you to the credit bureaus if your payment is 30 days or more late.

Of course, your account could go into collection, or they could get a judgment against you if they felt it was worth the time and money to go those routes.

The central concept you need to understand is that secured loans, whether it’s on real estate or automobiles or something else, are always less risky to lenders than is unsecured debt such as credit cards. As a result, that unsecured debt on your credit report, courtesy of the cards in your wallet, will always get judged more severely in the credit-scoring world.

In summary, not all debt is created equally. Credit-card debt is the form of debt most closely watched by the credit industry because it’s unsecured and largely controlled by your choice of spending and payments. Credit cards are more frequently used than other form of debt too, thereby providing more insights into your overall financial habits.

Video: How to Boost Your Credit Rating

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Author: The Money Coach

Watch this video to get tips on how to boost your credit score.
Click here to buy your copy of Perfect Credit: 7 Steps To A Great Credit Rating

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Posts Tagged ‘Credit Scores’